The overall financial efficiency of your client’s business results from the interaction of ‘profitability’ on the one hand and ‘investment’ on the second. Looking at ‘return on equity’ benchmarks can be problematic, as there are many variables in small businesses which will materially affect the comparability of those results.
However, reviewing Asset Turnover benchmarks and some of the component factors that cause it can yield useful insights. These are more comparable across many companies, so the averaging process is a valuable exercise.
The key formula is ‘more revenue’ or ‘more profit’, from a constant or lower asset base.
Improvements in the asset mix or structure will often not have dramatic impact on total profits generated – but it will improve the overall return on investment. For example, it might let a client company turn some of its assets (eg debtors or stock, for example) into cash. Once this is achieved, the cash might provide funds for expansion; it might allow some debts to be repaid (this in turn lowers interest costs into the future); or it might allow the owners to withdraw some of their investment from the business, to fund either lifestyle or other investments. But these decisions can only be made after the flexibility or option has been created!
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